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© Rolls-Royce plc 2005
Legal information

Credits

Annual report and accounts 2004

Corporate governance

 

Corporate governance

The Company is committed to the highest standards of corporate governance. The Board confirms that throughout 2004 the Company complied with the provisions of the Combined Code. This report and, where appropriate, the directors’ remuneration report, describe how the Board has applied the principles and complied with the provisions of the Combined Code.

The Board

The Board currently comprises a non-executive Chairman, a Chief Executive, five other executive directors and eight non-executive directors.

The division of responsibilities between the Chairman and Chief Executive is established in writing and agreed by the Board. This document was revised and updated prior to the appointment of Mr S M Robertson as Chairman.

Following Lord Moore’s appointment as Interim Chairman on June 21, 2004, Sir Robin Nicholson was appointed as the Company’s Senior Independent Director. He performed this role until February 9, 2005 when he was succeeded by Mr P J Byrom.

Biographical details of the Board, including other significant commitments, are given in the Board of directors.

Information and Professional Development

On joining the Board, newly appointed directors follow a comprehensive induction programme and receive relevant information on the Group. Over the induction period, new directors visit key sites and meet with the Business Sector Presidents and other employees to gain knowledge and understanding of the Group and its business. In addition, an existing executive director acts as a mentor to each newly appointed non-executive director, providing guidance and information as required.

There is an agreed procedure for directors to take independent professional advice at the Company’s expense. This is in addition to the access every director has to the Company Secretary and the General Counsel.

Board Charter

The Board has approved the following Charter summarising its core responsibilities:

Primary goal
Creating value for the long-term investor in the Company is the primary goal of directors and underpins all decisions taken by the Board.

The Board’s tasks
Consistent with this primary goal, the Board’s tasks are to:
– ensure that, when executed, the Group’s strategic and financial plans generate shareholder value and that the necessary financial and human resources are in place to deliver those plans. The Board will review and approve major allocations of capital and significant business decisions to ensure that they are fully in line with the primary goal;
– ensure that effective controls are in place to manage risk;
– monitor progress and ensure that the Group’s financial and other forms of reporting present an accurate assessment of the Group’s position and prospects and are effectively communicated to shareholders and other stakeholders;
– ensure that the Group meets the highest legal and ethical standards;
– evaluate continuously the performance of the Group’s senior executives and develop an effective remuneration policy;
– ensure that succession plans are in place for Board directors and senior executives and approve candidates for election to the Board;
– establish the necessary committees to enable the Board to fulfil its Charter; and
– evaluate the effectiveness of the Board and its committees at least annually.

Operation of the Board

The Board has a schedule of matters reserved to it for decision, which is updated annually. The requirement for Board approval on these matters is understood and communicated widely throughout the Group.

The directors have full and timely access to all relevant information to enable the Board to function effectively.

Board meetings

The Board met eight times during the year. Details of the directors’ attendance are contained in the table below.

Board committees

Details of the membership of Board Committees and their principal terms of reference are set out below and in the Directors' remuneration report. The full terms of reference for these Board committees are available in the Investors section on the Group’s website at www.rolls-royce.com. Attendance at the three principal Board committees is shown in the table below.

Attendance at meetings of the Board and its principal committees in 2004

		Board			Audit			Nominations			Remuneration
Director	Held*	Attended		Held*	Attended		Held*	Attended		Held*	Attended
Mr J P Cheffins	8	8
Mr C H Green	8	7
Mr J M Guyette	8	8
Dr M G J W Howse	8	8
Sir John Rose	8	8					10	10
Mr A B Shilston	8	8
Mr D E Baird	3	–
Hon A L Bondurant	8	8					10	10
Mr P J Byrom	8	8		4	4		6	6		4	4
Mr C-P Forster	8	8					6	5		4	4
Lord Moore of Lower Marsh	8	8		2	2		10	10
Sir Robin Nicholson	8	7		4	3		10	10
Mr S M Robertston	2	2
Mr I C Strachan	8	8		4	4		6	5
Mr C G Symon	8	7					6	6		4	4
Sir John Taylor	2	2
Sir John Weston	7	6					6	6		3	3
* During the period a director was in office or a member of a committee

The Group Executive

The Group Executive is responsible for the management of the Group within the strategy determined by the Board. It is chaired by Sir John Rose, Chief Executive, and its other members are:
Mr A Arendt, Chairman Rolls-Royce Deutschland Ltd & Co KG
Mr B Baker, Commercial Director and General Counsel
Mr C E Blundell, Company Secretary and Director of Government Relations
Mr J P Cheffins, Chief Operating Officer
Mr M Cowdry, Director – Services
Mr E T Curley, President – Energy
Mr C H Green, President – Defence Aerospace
Mr J M Guyette,President and Chief Executive Officer of Rolls-Royce North America Inc.
Mr C J Hole, Director of Procurement
Dr M G J W Howse, Director – Engineering and Technology
Dr S Lanyado, President – Marine
Dr M Lloyd, Director – Gas Turbine Operations
Mr J R Rivers, Director – Human Resources
Mr A B Shilston, Finance Director
Mr M J Terrett, President – Civil Aerospace

Nominations committee

In 2004 the nominations committee was chaired by Lord Moore of Lower Marsh. With effect from January 1, 2005 the committee was chaired by Mr S M Robertson. Its members were the Hon A L Bondurant, Sir Robin Nicholson and Sir John Rose until May 10, 2004 when Mr P J Byrom, Mr C-P Forster, Mr I C Strachan, Mr C G Symon and Sir John Weston joined the committee to enable all the then non-executive directors to participate in the search and appointment process for a new Chairman. On his retirement from the Board, Sir John Weston ceased to be a member of the committee with effect from December 1, 2004. The committee met ten times during the year. The number of meetings attended by each member is shown in the table above. With effect from February 9, 2005, the membership of the committee comprised the Hon A L Bondurant, Mr P J Byrom, Mr C-P Forster, Sir John Rose, Mr I C Strachan and Mr C G Symon, with Mr S M Robertston continuing to serve as chairman of the committee.

In the first quarter of each year the committee reviews the performance of each director. The performance of the Chairman is appraised annually at a meeting of the non-executive directors chaired by the Senior Independent Director.

The committee also leads the annual process which enables the Board to evaluate the effectiveness of its performance. This involves the completion of a written questionnaire by all directors of the Company. The results of this exercise are subsequently reviewed by the Board.

The committee makes recommendations to the Board on the appointment of executive and non-executive directors and on the membership of Board committees. It is assisted in the former task by external recruitment consultants. The committee reviews succession planning for appointments to the Board and to other senior positions within the Group. In the case of the appointment of
Mr S M Robertson as Chairman, the committee confirms that an external consultancy was used to assist with the search process. The committee also prepared a detailed job description and made an assessment of the time commitment required.

In carrying out its tasks, the committee gives careful consideration to the balance of skills required on the Board, including the need to reflect diversity, international experience and managerial and business skills. Before recommending any appointment to the Board, the committee satisfies itself that the appointee will have sufficient time available to discharge his or her responsibilities effectively.

Remuneration committee

The remuneration committee’s membership and principal terms of reference are set out in the directors’ remuneration report. The committee met four times during the year. The number of meetings attended by each member is shown in the table above.

Audit committee

The audit committee consists exclusively of independent non-executive directors and is chaired by Mr P J Byrom who has recent and relevant financial experience. In 2004, its other members were Sir Robin Nicholson and Mr I C Strachan. Lord Moore served on the committee until June 21, 2004. Mr I C Conn became a member of the committee with effect from January 20, 2005. The committee met four times during the year. The number of meetings attended by each member is shown in the table above.

The committee has responsibility for reviewing the Group’s financial reporting and accounting policies, including major announcements to the London Stock Exchange and the Group’s approach to International Financial Reporting Standards. It is also responsible for the relationship with the external auditors and for the internal audit function, which is termed Business Assurance. In addition, it reviews the Group’s procedures for detecting, monitoring and managing the risk of fraud.

The committee is responsible for recommending to the Board the appointment of the external auditors. It is also responsible for reviewing the scope of the audit, approving the audit fee and, on an annual basis, satisfying itself that the auditors are independent.

In addition, the committee is responsible for assessing the Group’s internal controls and its systems for assessing and mitigating financial and non-financial risk.

In order to safeguard auditor independence and objectivity, the following policy is applied in relation to services provided by the auditors:

Audit related services – these are undertaken by the auditors as it is work that they must, or are best suited, to perform. It includes formalities relating to borrowings, shareholder and other circulars, risk management services, various regulatory reports and work in respect of acquisitions and disposals.

Tax, accounting and mergers and acquisitions – The auditors are used for this work where they are best suited to undertake it. All other significant consulting work in these areas is put out to tender.

All other advisory services/consulting – The auditors are generally prohibited from providing these services.

Throughout the year the committee monitors the cost of non-audit work undertaken by the auditors and is, therefore, in a position to take action if at any time it believes that there is a risk of the auditors' independence being undermined through the award of this work.

The committee reviews and approves the Business Assurance work programmes and ensures that this function is adequately resourced and co-ordinated with the work of the external auditors.

Risk committee

The risk committee is chaired by Sir John Rose and its other members are Mr J P Cheffins, Mr C H Green, Mr J M Guyette, Dr M G J W Howse and Mr A B Shilston. The committee is responsible for the Group’s risk management and for reporting to the Board key risks and the associated mitigating actions.

Political donations

In line with its established policy, the Group made no political donations during 2004.

Communication with shareholders

The Company attaches importance to the effectiveness of its communications with shareholders. It publishes an Annual review and summary financial statement as well as a full Annual report. There are also separate reports for Environment and Community Relations.

The Company maintains a regular dialogue with institutional shareholders including making presentations to them after the preliminary and interim results. In October 2004, the Company held a major investors’ seminar in New York at which the Presidents of the Business Sectors and other senior executives described the Group’s businesses and key strategic priorities. All shareholders
can gain access to these and other presentations, as well as to the Annual report and other information about the Group, on the Group’s website at www.rolls-royce.com.

Holders of ordinary shares may attend the Company’s AGM at which the Company highlights key business developments during the year and at which shareholders have an opportunity to ask questions. The chairmen of the audit, remuneration and nominations committees are available to answer any questions from shareholders on the work of their committees.

The Company confirms that it sends the AGM notice and relevant documentation to all shareholders at least 20 working days before the date of the AGM. For those shareholders who have elected to receive communications electronically, notice is given of the availability of documents on the Group’s website.

Responsibility for maintaining regular communications with shareholders rests with the executive management team led by the Chief Executive. However, the Board is informed on a regular basis of key shareholder issues, including share price performance, the composition of the shareholder register and City expectations. Independent research is commissioned annually into institutional shareholder perceptions of the Group. The Senior Independent Director and the non-executive directors also have the opportunity to meet with shareholders as appropriate.

Internal controls and risk management

Directors’ responsibilities

The directors are responsible for the Group’s system of internal control and for maintaining and reviewing its effectiveness from both a financial and operational perspective. The system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and to provide reasonable but not absolute assurance against material misstatement or loss.
The Group’s approach to internal control is based on the underlying principle of line management’s accountability for control and risk management.

In reviewing the effectiveness of the system of internal control, the Board has taken account of the results of all the work carried out to audit and review the activities of the Group.

There is an ongoing process to identify, assess and manage risk, including those risks affecting the Group’s reputation. This process is subject to continuous improvement and has been in place throughout the financial year to which these statements apply and up to the date of their approval.

The Board has reviewed the risk management process and confirms that it complies with the Turnbull Committee Guidance on Internal Control.

The Board has a risk committee, chaired by the Chief Executive, with specific accountability for the system of risk management and for reporting key risks and their associated mitigating actions to the Board. Details of the membership of the committee are set out above.

Organisation

The Group has a clearly defined organisational structure within which operational management have detailed responsibilities and levels of authorisation, supported by written job descriptions and operating manuals.

Rolls-Royce also has a code of business conduct which lays down the principles to be followed by employees in the course of conducting business.

The code also gives guidance to support achievement of the required standards. Additionally, confidential reporting lines enable UK and US employees to report, outside the normal management chain, any concerns they may have with regard to business conduct.

Risk management system

The risk management system is an integral part of management’s approach to delivering business objectives and is a systematic process designed to identify, assess, treat, manage and communicate risks. It also provides a method of escalation and delegation to the appropriate level within the organisation and ensures actions are owned, defined, resourced and effective.

Management is responsible for the ongoing identification and evaluation of significant risks within their areas of responsibility and, using a common process, for the operation of suitable controls or mitigation actions. Risks are recorded in regularly updated risk registers operating at all levels of the organisation and are continuously reviewed and monitored. During the review processes, significant emphasis is placed on learning from and sharing prior experience. Risks may arise from a variety of internal and external sources. They may be associated with regulations, customer requirements and competitor actions or could result from the capability of the processes used to execute the business or from external and largely unpredictable events, such as terrorist activity or war.

Risks, irrespective of source, are managed through processes operated by project and functional teams. Management reports regularly to the risk committee on its view of risks and how they are managed, so that the Board can then consider and review these risks in terms of their potential impact.

Management has continued to perform comprehensive risk reviews for all key projects, programmes and business change plans. In addition, all the processes operated by the Group are subject to continuous improvement, including the risk management process itself.

Systems of internal control

The general managers of individual businesses are aware of their responsibility to operate systems of internal control which provide reasonable assurance of effective and efficient operations, reliable financial information and compliance with laws and regulations. Financial managers are required to acknowledge in writing that their routine financial reporting is based on reliable data and that their results are properly stated in accordance with Group requirements.

The Group has a comprehensive budgeting system with an annual budget approved by the Board. Revised forecasts for the year are reported at least quarterly. Actual results are reported monthly against budget and variances reviewed.

The activities of the Group are subject to review by the Department of Risk, including Business Assurance and Project Risk Assessment, and the assurance functions of Health, Safety and Environment, Quality and Engineering. These functions operate to work programmes agreed by the appropriate Board member.

The Business Assurance function, which works closely with the external auditors, undertakes a programme of financial and operational audits and reviews agreed by the audit committee and covering all Group activities. The programme includes independent reviews of the systems of internal control and risk management. Findings are reported to the audit committee four times a year and to the risk committee twice a year.